May 20, 2014

Who Is a ‘Foreign Official’ under the FCPA? Eleventh Circuit Weighs In

by the White Collar Defense/Internal Investigations Group

Providing appellate guidance for the first time, the U.S. Court of Appeals for the Eleventh Circuit interpreted a key term defining the types of “foreign officials” subject to the Foreign Corrupt Practices Act (FCPA) and affirmed the longest prison sentence under the bribery statute to date. The decision is important because it provides an extensive list of factors to aid in determining whether an entity should be considered a government "instrumentality" and therefore subject to the FCPA. The opinion centers on two defendants who allegedly bribed executives of a state-owned telecommunications company in Haiti.

The FCPA prohibits corrupt payments to “foreign officials,” which the statute defines as “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” Although the FCPA does not define “instrumentality,” the U.S. Department of Justice (DOJ) has long argued that “instrumentality” includes state-owned or state-operated entities.

In U.S. v. Esquenazi, the Eleventh Circuit held that “instrumentality” means an entity controlled by a foreign government that performs a function that the foreign government treats as its own. The court acknowledged this test requires fact-intensive analysis and offered examples of criteria for courts to consider when applying it.

First, to determine whether a foreign government controls an entity, courts and juries should look to:

The foreign government’s formal designation of that entity

Whether the government has a majority interest in the entity

The government’s ability to hire and fire the entity’s principals

The extent to which the entity’s profits, if any, go directly into the government trust and the extent to which the government funds that entity if it operates at a loss

The entity provides services to the foreign country’s public at large.

The public and the government of that foreign county generally perceive the entity to be performing a government function.

The DOJ indicted, among others, defendants Joel Esquenazi and Carlos Rodriguez for violations of the FCPA and other related crimes arising from alleged bribes paid to executives at Haiti’s state-owned telecommunications company, Telecommunications D’Haiti S.A.M. (Haiti Teleco). The government argued that Haiti Teleco is an instrumentality under the FCPA because it was 97 percent state-owned and 100 percent state-controlled when the defendants allegedly paid the bribes. The jury convicted both defendants, and Mr. Esquenazi received an FCPA record-setting sentence of 15 years, while Mr. Rodriguez was sentenced to seven years. Judge Beverly B. Martin, writing on behalf of the appellate court, affirmed and agreed with the government; she noted that “Teleco would qualify as a Haitian instrumentality under almost any definition we could craft[.]”

In light of the overwhelming government ownership of Haiti Teleco, the Eleventh Circuit's decision that it was a government "instrumentality" for FCPA purposes was not surprising. Other factual scenarios may not be so abundantly clear, however, and the decision provides important guidance for companies trying to determine if an entity it is doing business with is a government "instrumentality." In making this determination, companies should address the following questions:

How is the entity designated by the foreign government?

Who holds an ownership interest in the entity?

Who appoints or removes the entity's leadership?

How does the entity generate revenue?

Whom does the entity serve?

In what sector does the entity work?

What is the entity's market share in that sector?

How does the foreign country perceive the entity's function?

By incorporating this type of evaluation into the company’s due diligence procedures as a part of its compliance program, the company should be able to make a more informed determination as to whether transactions with a certain foreign entity would be governed by the FCPA.

Attorneys on Ballard Spahr’s Anti-Corruption Team have extensive experience in assisting corporate clients in designing compliance programs and can assist in designing proper questions to ask when working with foreign entities. For more information, please contact Henry E. Hockeimer, Jr. at 215.864.8204 or hockeimerh@ballardspahr.com.

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